In part 2 of a series, we look at how HK$16bn of market cap evaporated when bubbles around China Railway Logistics, PME and Forefront burst. Each dealt with the same purported arm of the Ministry of Railways for joint ventures in wagon-leasing, media and online ticketing, each of which failed to get started. A miriad of BVI shells with shadowy owners are involved, but at least one has exposed himself in a court case.

China Railway Games
11 June 2009

Continuing on from our Byford story, this instalment is a complicated story which we will tell in chronological order. Pour yourself a large cup of coffee and pay attention. It focuses on three listed companies: China Railway Logistics Ltd (CRL, 8089, formerly named "Proactive Technology Holdings Ltd"), PME Group Ltd (PME, 0379) and Forefront Group Ltd (Forefront, 0885), and the common thread to all of them is unsuccessful dealings with various purported tentacles of state-owned China Railway, including a purported HK subsidiary.

Each of the listed companies, like Byford, dealt with BVI companies with previously unheard of owners, at least one of whom we can show was just a stooge. The hype surrounding these companies caused bubbles in their stocks which later burst: at market prices, PME was once worth HK$5.9bn, CRL was once worth $8.3bn and Forefront $3.8bn, a total of $18bn. Some $16bn of that is gone now.

Are you sitting comfortably? Then we'll begin...

China Railway Logistics

On 7-Nov-06, Mr Tsang Chi Hin (C H Tsang), then Chairman, Co-founder and CEO of CRL, at the time a sleepy little GEM stock, sold 22.59% of CRL to Well Support Ltd (Well Support, BVI) at $0.08 per share for HK$4.19m. Like many GEM stocks, it was tightly held - when it was listed in 2000, 10 investors held 82.2% of the public float, which was 20% of the company. The owner of Well Support was not named, although it later turned out to be the family trust of Mr Liu Yi Dong (Mr Liu). He did not join the board, and we know nothing about him. When trading resumed on 8-Nov-06 after Mr Liu's purchase, the price jumped 1100% from $0.045 to close at $0.54.

On 21-Nov-06, CRL launched a top-up placing  of 46.4m shares (16.67% of enlarged) at $0.241, a 19.7% discount to market, raising $11.2m gross ($10.9m net) via Kingston Securities Ltd (Kingston Securities), exhausting the general mandate.

On 5-Dec-06, CRL signed an MOU with Shellybeach Investments Ltd (BVI, Shellybeach) regarding a possible acquisition of at least 51% of Eternity Profit Investments Ltd (BVI, Eternity Profit) from Shellybeach, making a deposit of $6m. Eternity Profit would form a joint venture later named "Onway Logistics Ltd" (HK, Onway) with China Railway Investments Group (Hong Kong) Ltd (CRIGHK, then "China Railway Television Media (Hong Kong) Ltd"), and that such joint venture would in turn form a mainland JV, namely China Railway Television Freight and Logistics Transport Co., Ltd. (later renamed CR Onway Freight Logistics and Transport Co Ltd, CR Onway) with Guangdong China Railway Television Media Ltd (PRC, GCRTM), to participate in the purchase of cargo trains and operation of railway transportation and logistics in the PRC. As far as CRL knew, CRTMHK was "held by" GCRTM (but see below). The owner of Shellybeach was not disclosed at the time.

On 23-Jan-07, a clutch of new directors joined the CRL board. Among them, Michael Koh Tat Lee (Mr Koh) and Lim Kwok Choi (Mr Lim) were appointed as EDs while Sunny Lok Shing Kwan (Sunny Lok) was appointed as INED.

On 2-Feb-07, CRL sent out a circular to refresh the general issue mandate, on which the IFA was Nuada Ltd. The mandate was approved on 21-Feb-07.

On 15-Feb-07, CRL revised the MOU for the cargo JV, to acquire 100% of Eternity Profit rather than at least 51%. Onway would be 61.25% owned by Eternity Profit and 38.75% by CRIGHK. CR Onway would be 80% owned by Onway, 16% by GCRTM and 4% by Beijing Run Tong Transportation Consulting Co Ltd (BRTTC).

On 12-Mar-07, CRL converted the MOU into an agreement to acquire Eternity Profit for HK$681.45m, of which $6m was the deposit and the rest satisfied by issuing 95m shares to Shellybeach at $7.11 per share. Eternity Profit had equity of just HK$0.1m at 31-Mar-07. CRL also launched a top-up placing of 55m shares at $7.11 via CCB International Capital Ltd (CCBI), raising $391m gross ($383m net), almost exhausting the general mandate. The placing was completed on 26-Mar-07. The announcement stated that 11m shares went to AT Asset Management (Asia-Pacific) Ltd, the short-lived HK office of Alliance Trust plc, and that 44m shares were placed to Bear Stearns Asia Ltd. However, disclosures show that 22m shares went to Gandahara Master Fund Ltd and 22m shares went to funds run by Indus Capital Partners LLC. Bear Stearns either never had, or never filed, a discloseable interest - it was probably just a broker in the deal.

Shellybeach would receive 22.18% of the enlarged capital of CRL. The announcement stated that GCRTM owned only 51% of CRTMHK, and the other 49% was owned by Pacific Telecom and Networks Limited (PTNet, BVI), an "independent third party". The owner of that was not disclosed, but whoever it was stood to gain substantially from the effective carried interest of 18.99% in Onway. As for Shellybeach, it was owned by Cheung Yu Ching (Ms Cheung). We know nothing about her, and she did not join the board of CRL. She remains in the shadows with Mr Liu.

Onway would contribute RMB200m to CR Onway for its 80% stake. GCRTM and BRTTC had purportedly contributed RMB50m of capital for their 20% stake, although this was possibly not all cash.

Who is PTNET?

Strangely for a purported telecom and network company, we could not find any web site for PTNet. The only online reference we can find to PTNet is an announcement by Canadian research network TRLabs on 17-Jan-06 that it had agreed with China Railway Television Media Co Ltd (CRSTV) and PTNet to develop and implement a prototype rail car system to provide passengers in trains and stations with access to TV, videos, broadband wireless internet and related services. PTNet's MD was named "Stephen Lai", and the MD of CRSTV was named as "Wang Jing" - whose name comes up later in this article as director of CRIGHK. The project was mentioned in TRLabs' 2006 annual review, but not after that. Probably best forgotten, eh?

Now we introduce PME again

On 2-Apr-07, PME, then a sleepy little industrial stock, launched a placing via Get Nice Securities Ltd of 191.6m new shares (16.67% of enlarged) at $0.172 per share, a 19.6% discount to market, raising $32.95m gross ($32.13m net). The placing was completed on 16-Apr-07. Meanwhile on 12-Apr-07, PME launched a placing via Kingston Securities of unlisted 12-month warrants to subscribe 220m shares at $0.25 per share, for $0.046 per warrant, raising $10.12m gross ($9.82m net). The exercise price was a 26.5% discount to the market price of $0.34. The warrants were issued on 20-Jun-07. 150m warrants were exercised by 30-Jun-07 and the rest in Jul-07, raising $55m.

PowerPoint presentation

During April 2007, a PowerPoint presentation was circulating in the market which clearly related to CRL's cargo deal, although it was described as "Hong Kong Listco" or "XYZ Company Limited" and was titled "Supplementary Information on Project Everbright", presumably the codename for the project. It's not clear who produced it, although the author in the document properties is a "William Lee". The presentation described in detail the financial plan, claiming that the payback period from buying and leasing the cargo wagons would be about 1.1 years (before funding costs and tax) - pretty incredible for an asset that should last for many years, perhaps decades. It also claimed a "de facto non-competition undertaking from [Ministry of Railways] for 50 years."

There's enough information on slides 11 and 12 to produce a profit forecast. We arranged for the presentation to be sent to the Stock Exchange Listing Division, asking why such specific information had not been published. Surely the public had a right to know - so click here to read it. You will notice on page 17 and 18 the claim that CRIGHK was "a wholly-owned subsidiary and window company of [GCRTM]". That was false - as noted above, 49% of CRIGHK was owned by PTNet, whoever they are. It also claimed that GCRTM is a wholly-owned subsidiary and window company of the Ministry of Railways.

On 20-Apr-07 CRL announced that the Beijing Municipal Bureau of Commerce had approved CR Onway has a Chinese-foreign cooperative joint venture on 9-Apr-07. You will see later why this was significant.

The acquisition circular was dated 25-May-07. It contained a discounted cash flow valuation report on CR Onway by Grant Sherman Appraisal Ltd, putting the value at RM8,047.4m, implying that the 49% economic interest acquired by CRL was worth $3,943m.

On 29-May-07, CRL announced that the Self-owned Wagon Management Office of the Harbin Railway Bureau "acknowledged" that CR Onway was qualified to operate the business of railway transportation and had complied with all necessary application and documentation requirements for the purchase of 100 tanker wagons.

On 4-Jun-07, CRL announced another top-up placing, this time of 49.766m shares (12.99% of enlarged) in two tranches at $13 via CCBI, raising $647m gross ($630m net). This was completed on 13-Jun-07, whereupon CRL immediately launched another top-up placing of 11.148m shares at $14 each via CCBI raising $156m gross ($155m net), which was completed on 25-Jun-07. That day, the stock closed at an all-time daily high of $19.44, valuing CRL at $7,665m.

CRL had almost exhausted the general issue mandate granted at the AGM on 30-Mar-07, so on 20-Jul-07, there was another circular to refresh the mandate, and this time the IFA was Veda Capital Ltd (Veda Capital). The mandate was approved on 9-Aug-07.

We pause to remind you that the Responsible Officers of Veda Capital are Julisa Fong Man, who was Chairman of Byford from 7-Sep-07 to 23-Apr-08, and Hans Wong Hin Shek, who was once a director of Kingston Corporate Finance Ltd and is still an ED of Golden Resorts Group Ltd (Golden Resorts, 1031), the Macau chip controlled by Pollyanna Chu Li Yuet Wah, who also controls Kingston group.

On 8-Jun-07, CRL announced that Onway had injected $100m into its 80%-owned mainland subsidiary, CR Onway.

On 20-Jun-07, the CRL acquisition of Eternity Profit was approved at an SGM. As of 30-Jun-07, the acquisition by CRL had not yet been completed, but the interim report shows that it had made a "deposit of the capital contribution for [CR Onway]" of HK$201.02m.

PME buys into CRL

On 25-Jun-07, the day the second CRL top-up placing completed and Mr Liu's shareholding was replenished, PME conditionally agreed to buy his entire holding of 52.42m shares (13.29%) of CRL at $17.72 for HK$929m, paid for by issuing 282m shares (17.8% of enlarged capital) of PME at $1.10 and $618.6m of 8% 3-year bonds convertible at $1.10 per PME share. This was the subject of a circular dated 22-Aug-07 which included another general issue mandate on which the IFA to PME was again Veda Capital.

As you will see below, this purchase never completed, but PME bought shares in CRL from Shellybeach instead.

PME's deal with CRIGHK

On 5-Jul-07, PME launched a placing via CCBI of 229m shares (14.33% of enlarged) at $2.49, a 19.68% discount to market, to raise $570.2m gross ($563m net) for "general working capital", although it went on to say that it could be used to "diversify into the multi-media advertising business". PME had acquired 100% of Best Time Far East Ltd (HK, Best Time) from a Mr Tan Hong Wen, for a nominal HK$100. We cannot find any trace of Mr Tan Hong Wen. The announcement stated:

"On 3 April 2007, Best Time entered into a co-operation agreement...with [CRIGHK], an associate of the Ministry of Railway, PRC for the development and application of multi-media entertainment and advertising business in the railway stations as managed by CRIGHK in PRC and provision of such services to other passenger trains and wagons. [CRIGHK] held the operation and management rights ("Rights") of all media related business ("Business") in the railway stations managed by [CRIGHK]...for a period of 10 years. Best Time and [CRIGHK] will form a joint venture for the operation of the Business. [CRIGHK] shall contribute the Rights to the new joint venture..."

That sounds like a lot to be giving up for just $100. Note the timing: the agreement between Best Time and CRIGHK was signed on 3-Apr-07, just a day after PME started pumping out warrants and shares in the two placings via Get Nice and Kingston Securities at escalating prices. Could it be that those who received the warrants and shares knew that this purported media deal was in the pipeline?

The Best Time deal was not quite that simple. Note 34 of PME's 2007 annual report shows that Best Time had made a loan of $25m to an unnamed party, which it had funded by borrowing from an unnamed party. On 31-Dec-07, the last day of the year, PME sold Peaknice Investment Ltd, which owned 100% of Best Time and 61% of Railway Media (China) Co Ltd, to a third party for $8,000, booking a loss of $186k. That neatly avoids subjecting Best Time's assets to any auditor's scrutiny. The railway media deal was not mentioned in the narrative of the annual report. Too embarrassing.

The placing was completed on 23-Jul-07. That day, PME shares closed at an all-time daily high of $3.73, valuing PME at $5,962m.

The 2007 year-end balance sheet showed "deposits placed with a financial institution" (probably a broker) "for trading in securities", of HK$200.4m, and bank deposits of $165m. What they did with all that money will be covered in a future article.

Forefront and CRIGHK

China Railway's various purported subsidiaries were apparently dealing with multiple listed shell companies simultaneously. We've already told you about PME and CRL. On 24-Jul-07, Forefront said that it was negotiating "with an independent third party regarding a possible investment in a mass transportation ticketing project". On 25-Jul-07 the stock closed at a record daily high of $2.55, valuing Forefront at $3,761m.

On 7-Aug-07, Forefront signed a non-binding MOU with Mr Tsang Kai Ming (K M Tsang) for the purchase, for $80m in cash, of Natural Harvest Investments Ltd (BVI, Natural Harvest) which in turn owned 61.25% of Talenteam Development Ltd (BVI, Talenteam) which in turn had agreed to subscribe 80% of China Railway Information and Technology Limited (CRIT), which would be a newly-established sino-foreign equity joint venture "to operate and to own or derive economic benefits in the China Railway Web Portal" at, including online ticketing.

Who is K M Tsang?

Forefront was and is in the orbit of what we will call the "Chung Nam Network", the full extent of which this article has no room for. We know nothing about K M Tsang, except that his name has come up in connection with one other company in the Chung Nam Network. On 8-Dec-06 he acquired a loan of HK$5m which was made on 8-Nov-07 by Hansom Finance Ltd  (a 100% subsidiary of Freeman Corp Ltd, Freeman, 0279) to Goldwiz Holdings Ltd (Goldwiz, 0586, delisted), and on 16-Mar-07 he issued a writ for repayment. Goldwiz announced this on 27-Mar-07, also saying that Sunderland Properties Ltd (Sunderland) had served a winding-up petition in relation to a deposit of $10m which it had advanced on 19-Jun-06 as earnest money for a possible rescue of Goldwiz. According to other disclosures, Sunderland was wholly-owned by Eugene Chuang Yue Chien (Eugene Chuang), who at various times has owned and is closely associated with Chung Nam Securities Ltd (Chung Nam Securities). On 22-May-06, a month before the earnest money was paid, Goldwiz had signed a margin client's agreement with Chung Nam Securities.

Earlier, on 14-Dec-06, Goldwiz said receivers had been appointed pursuant to the terms of a debenture (the amount was $75m) for a secured loan to Goldwiz from CUPAC Finance Limited, another company in the Chung Nam Network.

Incidentally, both Chung Nam Securities and Kingston Securities featured in the recent PCCW vote-splitting court case.

As we will show shortly, the mysterious K M Tsang might not have been the true owner of Natural Harvest.

Sour JV

Anyway, back to Forefront and CRIGHK. On 21-Aug-07, the MOU became an agreement, and the announcement disclosed that the rest (38.75%) of Talenteam was owned by CRIGHK, while China Railway Television Media (Mainland) Limited (CRTMM) owned the rest (20%) of CRIT, and that CRIGHK and CRTMM had the same ultimate shareholder. This ownership structure, an 80:20 mainland JV and a 61.25:38.75 HK JV, is identical to that used in the CRL/ Onway/ CR Onway deal. CRIT would have $200m of registered capital, just like CR Onway. CRIT had $50m of paid-up capital and Talenteam was liable for a further $150m.

$20m was paid to K M Tsang as a refundable deposit, and the remaining $60m was due on completion, which occurred on 7-Sep-07. CRIGHK was also (or at least appeared to be) a shareholder in Forefront - it had increased its holding from 4.75% to 6.43% on 15-Aug-07 and to 7.84% on 22-Aug-07, in circumstances which we will describe later in this article.

It didn't take long for Forefront's deal to go sour, if indeed it wasn't sour at the outset. In its 2007 results announced on 25-Apr-08, it wrote:

"After the completion of the sale and purchase agreement, the PRC partner refused to provide information of the financing positions, the situation of the injected funds as well as the status of the web portal projects. On the other hand, they requested immediate capital injection of an additional capital contribution HK$150 million pursuant to a joint venture agreement. The PRC partner has also commenced arbitration proceedings in PRC on the capital injection matter. The Group has obtained a PRC legal opinion and believes that the probability of being successfully claimed by the PRC partner is remote. Legal action against the PRC partner for redress by the Group has not been commenced as the Group is awaiting the result of a similar action by an independent party against the PRC partner. In view of the PRC legal opinion and actual situation, the Board made a full impairment on the investment." (emphasis added)

They also said that a director had reported the case to the HK Commercial Crime Bureau of the police in November 2007. You might wonder why they didn't disclose this earlier than 25-Apr-08, five months later. Surely it was price-sensitive information. Forefront was merrily issuing shares in a rights issue (underwritten by Chung Nam Securities) and a placing (via Get Nice Securities Ltd) in between the failure of the joint venture and the disclosure of that failure. In the interim results published on 19-Sep-08, Forefront went further, saying of its PRC partner:

"They even refused to account for the whereabouts of the initial capital contribution of HK$55 million...In the opinion of the directors, the PRC partner was a fraudster...The Company's indirect non wholly-owned subsidiary, [Talenteam], received notification dated 4 July 2008 from China International Economic and Trade Arbitration Commission regarding the withdrawal of such arbitration proceedings from the PRC partner"

Do they protest too much?

Eugene Chuang, CRIGHK and Forefront

Now, what was that "similar action by an independent party"? We think they must be referring to HCA2432/2007, in which Capital Union Inc (Capital Union) sued CRIGHK, and applied for "summary judgement" (which basically means a judgement for the plaintiff without trial of the issues, if the case has no realistic defence). The "principal shareholder" of Capital Union was Eugene Chuang. The claim was based on two loans made by Capital Union to CIGHK dated 15-Aug-07 for $100m and 23-Aug-07 for $50m. The loans were used to buy shares in Forefront, but there were disputes between the parties as to whether the loans were binding on CRIGHK or whether they were genuine loans at all. CRIGHK made 2 defences:

  1. It said that under its memorandum and articles of association, it was required to have at least 2 directors, and Eugene Chuang knew that it only had one, therefore its purported board minutes authorising the loan were invalid and so was the loan.
  2. It said that the loans "were sham transactions which were intended to disguise the fact that...Mr Chuang was the true investor in the shares of Forefront that were acquired using the proceeds of the purported loans".

To support point 1, the defendant filed an affirmation by a current director of CRIGHK that he was not a director at the time of the loans, on the basis of information supplied by Mr Wang Jing, who claimed to be the only director. The judge wrote:

"Wang was said to have been unable to make an affirmation because he was unable to leave the Mainland to come to Hong Kong, having been prevented by authorities there from doing so." (emphasis added)

So Mr Wang Jing apparently is or was being detained or restrained up North. Now here's where things get interesting, in paragraph 7 of the judgment:

"According to the Defendant [CRIGHK], earlier in 2007, it had entered into a joint venture agreement with another company controlled by Mr Chuang (known as Natural Harvest Investment Limited ("Natural Harvest")), to develop a platform for the electronic sale of railway tickets in the Mainland through the internet. It was said that some HK$500,000,000 was to be invested in the joint venture. The joint venture does not, however, appear to have worked out, and it appears that the Defendant has commenced arbitration proceedings on the Mainland in respect of the joint venture.
Mr Chuang agrees that there was such a joint venture. He says that after entering into it, he decided to transfer the shares of Natural Harvest to Forefront. This was done on about 7 August 2007." (emphasis added)

Hold on a minute - by his own admission in court, Mr Chuang controlled Natural Harvest - and we all thought that it was K M Tsang who sold Natural Harvest to Forefront. Assuming the judgment is accurate, it seems that Mr K M Tsang was just a "front" or stooge for Eugene Chuang. The date matches: 7-Aug-07 was the date of the MOU with K M Tsang. Shareholders have been misled, big-time. The judgment continues:

"Mr Chuang says that it was just after this that he was approached by Mr Wang, who said that the Defendant wished to purchase shares in Forefront, as it was expected that such shares would rise in value in the longer term, given the injection of Natural Harvest (and thus an interest in the joint venture) into Forefront.  He says that Mr Wang told him that the Defendant did not have funds available for this, and that it wished to borrow the necessary funds to enable it to do so.  Mr Chuang says that he agreed that the Plaintiff would lend the Defendant a total of HK$150,000,000 to purchase shares in Forefront, and that this was the reason for the loans which are the subject of these proceedings.  Mr Chuang also says that the loans were insufficient to cover the cost of the shares that were purchased, but that the balance of the cost of the shares was made available to the Defendant by way of margin facilities provided by Chung Nam Securities Limited ("Chung Nam"), a securities dealing company of which he was the major shareholder.  He says that Mr Wang gave him authority to purchase Forefront shares on behalf of the Defendant, using the proceeds of the loans, and that he duly did so, acquiring a total of 140 million shares in Forefront for the Defendant on 14, 15 and 22 August 2007, at a total consideration of HK$204,135,963.38 using the loan from the Plaintiff and the margin facilities from Chung Nam"

This sounds implausible to us, because in effect, CRIGHK would be getting a 100% loan from Mr Chuang's companies, without any collateral, against a small-cap stock which, even on a good day, you could not borrow more than 50% for. But we continue with the judgment:

"The Defendant's version of events is very different.  It says that it was in fact Mr Chuang who wanted to acquire shares in Forefront, and that he suggested that instead of doing so himself, or through companies controlled by him, he should do so using the name of the Defendant.  He explained to Mr Wang that by doing this, it would create the impression that a substantial Mainland company associated with the Ministry of Railways was acquiring a significant stake in Forefront, which had just acquired the shareholding in Natural Harvest and thus an interest in the joint venture.  This would be likely to cause the value of the Forefront shares to rise, to Mr Chuang's advantage.  The Defendant says that Mr Wang reluctantly agreed to this, as he did not want to jeopardise the substantial investment that was to be made in the joint venture."

Now that sounds much more plausible - using a big name to promote the stock. Then the judge finds other inconsistencies in Mr Chuang's version of events:

"It is also to be noted that the 1 August 2007 minutes [of CRIGHK] have certain other curious features:-

(1) They refer to a copy of the loan agreement - however, on Mr Chuang's case, he was not approached for the loan until 7 August 2007.  It is odd that the loan agreements should have been available at board meetings which purportedly took place some days before that.

(2) They suggest that the board meeting in question took place in Hong Kong, at an address which is in the same building as (and just one floor below) the address of Chung Nam, when Mr Wang has said that he was not in fact in Hong Kong that day."

Oops! The judge concluded:

"there do appear to be a number of features of the evidence that call into question the true nature of this transaction, which would appear to be best investigated at a trial of these proceedings"

The judge therefore granted unconditional leave for CRIGHK to defend the action. As far as we know, the case has not yet been heard. Incidentally, the solicitors for the plaintiff were Andrew Lam & Co - the firm founded by Andrew Lam Ping Cheung, the lawyer convicted in the Semtech case, who was formerly an independent non-executive director of a number of companies in the Chung Nam Network.

Back to CRL

After that detour to show you CRIGHK's other failed deals with PME and Forefront, we return to the cargo deal with CRL.

On 12-Jul-07 the acquisition by CRL of Eternity Profit was completed, and the 95m shares were issued to Shellybeach. The share price that day was $17, valuing the new shares at $1,615m and the entire company at a whopping $8,318m.

On 2-Aug-07, CR Onway Freight Logistics and Transport Co Ltd (CR Onway) signed a non-binding letter of intent with China Shenhua Rolling Stock Branch for the leasing of self-owned wagon trains operated by CR Onway.

On 14-Sep-07, PME announced that the EGM to approve the purchase of Mr Liu's stake in CRL had been adjourned, in view of the slump in the CRL share price to $11.02.

As you will recall, Shellybeach, owned by they mysterious Ms Cheung, was the vendor of the cargo project to CRL, and received 95m CRL shares in return. On 29-Oct-07, according to dealing disclosures, Ms Cheung sold Shellybeach to a company owned by Mr Chan Foo Wing (Mr Chan), for $7.20 per CRL share, making him a 19.41% shareholder of CRL. Mr Chan has not served on any HK-listed boards and didn't join CRL's either. The only trace of him we can find is that on 18-Oct-02 (before the disclosure threshold dropped from 10% to 5%) he increased his holding in Same Time Holdings Ltd (0451) from 9.96% to 10.12%, becoming a discloseable shareholder. His shareholding was consolidated 20:1 and gradually diluted to 5.62% in following years, although he did not file any more disclosures until he sold it by accepting a general offer on 26-Mar-09.

On 17-Dec-07, PME agreed to buy 71m shares (14.51%) of CRL at $4 each from Shellybeach for $284m in cash. The deal completed 2 days later. Meanwhile, discussions purportedly continued with Mr Liu on amending the deal to buy his shares, and the deadline for fulfillment was extended to 30-Jun-08 and then terminated.

On 20-Dec-07, Albert Ha Shu Tong (Mr Ha) was appointed as CEO of CRL. He knew CRL's ED Mr Koh. Mr Ha had taken over from Mr Koh as Chairman of M Dream Inworld Ltd (8100) on 13-Apr-07, and both were still serving on that board when Mr Ha joined CRL.

On 5-Feb-08, the first visible signs of trouble emerged. CRL announced that according to a media report, CR Onway had issued a writ of summons in HK against the financial controller of CR Onway, alleging misappropriation of RMB73m. As far as the directors of CRL were aware, there had been no such loss. Until the media report CRL was not aware of the proceedings, which had not been approved by the board of CR Onway "and may be connected with efforts by [CRL] to effect changes to the management of CR Onway".

On 28-Feb-08, CRL announced further details of the trouble at CR Onway. CRL owned 61.25% of Onway, which had contributed $151.98m into CR Onway, of which Onway supposedly owned 80%. CRL said that "in or around August 2007" it had come to CRL's attention that the JV agreement approved by the Ministry of Commerce (MoC) on 9-Apr-07 was not "in the terms that [CRL] had understood". CRL had been operating on the assumption that Onway controlled the board of CR Onway with a right to appoint 4 out of 7 directors, including the Chairman, but the approved JV agreement only gave them 3 out of 7, and GCRTM had the right to appoint the Chairman. This begs the obvious question: if CRL knew about this problem in or around August 2007, why did it take them 6 months to announce it? Surely it was price-sensitive information. CRL also said that although the MoC had approved conversion of CR Onway into a China-foreign cooperative joint venture on 9-Apr-07, CR Onway "had not yet been formally converted as such" and therefore Onway was not registered as a shareholder of CR Onway.

On 10-Mar-08, Mr Ha resigned, Mr Lim became Chairman, and Sunny Lok was changed from INED to ED.

On 12-Mar-08, CRL lost its 4th Qualified Accountant in as many months, Caroline Siu, following the resignation of Mr Wong Yiu Hung on 1-Feb-08, Ms Wong Han on 13-Dec-07, Ivan Li Kam Cheung on 12-Nov-07. Happily for companies like CRL, but not for investors in HK, the Stock Exchange abolished the requirement that listed companies should have a qualified accountant on 1-Jan-09.

On 28-Mar-08, CRL announced its 2007 results, losing $1,691m, including an impairment of $1,622m of goodwill on the acquisition of Eternity Profit. Notably for this outstanding performance, Mr Koh was awarded a discretionary bonus of $6m on top of his 2007 salary of $2.92m. CRL had advanced $200m to its 61.25% subsidiary Onway, which had in turn had advanced $151.98m to CR Onway, and this was accounted for as a deposit for acquisition. CRL said it had formed a Special Committee to review the circumstances surrounding the acquisition and identify a strategy to protect CRL's interests in CR Onway. The committee comprised C H Tsang, Lawrence Lok Yuen Ming (Lawrence Lok, described as "the assistant to the Chairman") and Mr Leung Ming Fai, the latest qualified accountant appointed 3 days earlier.

About Lawrence Lok Yuen Ming

Lawrence Lok and Sunny Lok were both once directors of a firm called CSI Investment Management Limited. We don't know whether they are related. Lawrence Lok was appointed on 3-Dec-04 to sit on an insider dealing tribunal case, but he resigned on 18-Jan-05 "prompted by matters unrelated to either the tribunal or the present case".

What matters could those be? Could it have anything to do with the fact that he was once Finance Director of US-traded China Energy Savings Technology, Inc (CESV)? This stock was suspended from trading on Nasdaq by the US SEC on 19-May-06. On 4-Dec-06 the SEC filed fraud charges against CESV, "alleging that they orchestrated an elaborate stock manipulation scheme". Lawrence Lok was not named in the action. He was finance director from 1-Jul-05 until 28-Apr-06 and was named in class actions, which were later abandoned. The SEC's interest may have been triggered by our article Golden Resorts and CESV (8-May-05), which related to a transaction involving the same asset as one with Golden Resorts, which, as we noted earlier, is controlled by the same person as Kingston Securities.

Lawrence Lok also made a guest appearance in a Securities and Futures Appeal Tribunal case involving a representative of Kingston Securities. Apparently:

"This gentleman, Lawrence Lok Yuen Ming, had introduced Kingston Securities, which thereafter had acted as the lead manager/underwriter for the Codebank listing"

Readers may recall that Codebank Ltd was a horrid little GEM company which still holds the record for the youngest infant mortality on GEM after a chunk of its IPO proceeds went missing. It was listed on 21-Dec-01 and last traded on 13-May-02, just 143 days old.

CR Onway's bank deposits frozen

On 1-Sep-08, Eternity Profit received a notice from CRIGHK that a mainland court judgment (the court name was not translated) was handed down upon CR Onway to freeze and set aside the bank deposits of CR Onway in the total amount of RMB131m (HK$149m).

"Based on the copy of the Judgement Notice received by [CRL], it appears that the Judgement Notice was made pursuant to the claim of a company known as [no translation provided] (the "Judgement Applicant") against [CR Onway] allegedly relating to a sale and purchase agreement in relation to a property...and a settlement order...has been granted by the Court in favour of the Judgement Applicant for [CR Onway] to pay for some settlement"

So it appears that CR Onway tried to buy property with some unspecified amount of the cash injected by Onway, which in turn was provided entirely by CRL, even though it only owned 61.25% of Onway which owned 80% of CR Onway. A later announcement on 4-Nov-2008 also stated:

"The Special Committee is also investigating whether GCRTM and BRTTC are subsidiaries of the Ministry of Railways of the PRC or not."

This is rather mind-boggling - the implication is that they now suspect they were dealing with bogus counterparties. It's the sort of thing that you should normally cover in day 1 of due diligence before making an acquisition. Obviously if GCRTM was not a subsidiary of the Ministry of Railways, then neither was CRIGHK - but that would also mean that Forefront and PME had been dealing with a phantom too. Is it really possible that none of them was aware of that? Or is it more likely that GCRTM and CRIGHK are genuine subsidiaries of China Railway? You decide.

CRL disposes of Eternity Profit at a loss

On 13-Oct-08, CRL agreed to sell Eternity Profit to Portstar Enterprises Ltd (BVI, Portstar) for $6.095m (the investment cost), and also agreed to sell to Portstar the debt due from Eternity Profit (which had a face value of $151.98m at 30-Aug-08) for $135m for the shareholder loans, which had a face value of $151.98m at 30-Aug-08. The sale of the debt was conditional on the mainland court's freezing order against CR Onway's bank deposits being lifted. Notably the completions of the two sales were not interconditional, so Portstar could complete the share purchase while leaving CRL with the debts. However, CRL had the right to buy back Eternity Profit at the same price until the sale of the debts was completed. The disposal was the subject of a circular dated 2-Dec-08.

Note 18(c) of the 2008 annual report states:

"After the disposal of [Eternity Profit], the Group is in close contact with Portstar to follow up the status of relevant legal and business procedures to recover the previous amount of deposits paid. Based on legal advice and update from Portstar, the directors consider the possibility of recovery of HK$151,980,000 is remote and impossible, and accordingly, full impairment loss in respect of the loan receivable was made"

The Portstar connection

The owner of Portstar was not disclosed by CRL, but we can tell you something else about Portstar. On 2-May-07, China Bio-Med Regeneration Technology Ltd (CBRT, 8158), then known as "B M Intelligence International Ltd" announced an MOU with Portstar for a possible investment in Gold Regent Corp Ltd (HK, Gold Regent), which was engaged in PRC internet caf├ęs. The owner of Portstar was not disclosed, but was an "independent third party". On 25-Jun-07, the MOU was replaced by an agreement for CBRT to buy 50% of Gold Regent from Portstar for a nominal price of $2. No funding plan had been determined for Gold Regent, which was still in negotiations to invest in an internet cafe operation.

On 2-May-07 (the same day as CBRT's MOU with Portstar), Agnes Yeung Sau Han (Ms Yeung) was appointed as an executive director of PME. Then on 8-Jun-07, she was appointed as an ED of CBRT. Keep in mind that at this point, apart from Ms Yeung, there is no visible connection between PME and CBRT.

On 16-Jul-07, Yu Sau Lai (Ms Yu) was appointed as ED of CBRT. The annual report for the year ended 30-Apr-07 stated Ms Yeung and Ms Yu are "responsible for the business development of the Group, especially in the internet cafe business in the PRC" - in other words, the business which CBRT had acquired 50% of from Portstar.

Mr Lim and Sunny Lok (ED and INED of CRL) and Ms Yeung knew each other - they had served together on the board of garment retailer LeRoi Holdings Ltd (Leroi, 0221). Ms Yeung, who has a higher diploma in fashion design, joined Leroi in 1998 and is the sister-in-law of its founder. Mr Lok joined as INED on 26-Aug-02, before the listing on 7-Nov-02. Mr Lim joined as ED on 30-Jul-04, and all left in Jan-07.

On 8-May-08, Ms Yeung was appointed as ED of CRL, and on 20-May-08, Mr Koh resigned.

On 21-May-08, PME bought 27.1% of CBRT from its then Chairman, becoming the largest shareholder. So CBRT and CRL both had PME as a substantial shareholder. What a coincidence that they have also dealt with the same independent BVI company, Portstar on two different transactions! We'll tell you more about CBRT in a later article.

Special Committee gives up

On 27-Jul-08, co-founder and former Chairman C H Tsang took medical leave, and Ms Yeung replaced him on the Special Committee.

On 14-Nov-08, CRL announced that the unnamed legal adviser and financial adviser to the Special Committee had resigned because their fees as billed had not been agreed and paid.

On 18-Feb-09, CRL announced that a new legal adviser to the Special Committee had been appointed, but did not name the adviser. Meanwhile it had settled the fees of the old legal adviser and the financial adviser, who had been reappointed.

On 2-Jun-09, CRL announced that on 19-May-09, the Special Committee told the board it was facing "limitations and difficulties" and that there would be a "tremendous amount of costs and expenses" to continue with the Review of the Eternity Profit deal. The board cited the "extravagant costs" involved and since Eternity Profit had already been disposed of, they gave up. We can't help wondering whether the Special Committee was something the Stock Exchange told them to establish, given the lengths they went to to justify abandoning it.

At the end of 2007, CRL was still sitting on a cash pile of $923m raised from the placings at the top of the railway concept bubble. What did they do with it? That will be the subject of Part 3.

©, 2009

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